Demystifying the October Stock Market ‘Trick or Treat’: A Data-Driven Perspective

Many generalized ideas about market “patterns”, are mythical when held to the light of data.

Soon countless youngsters across the country will be celebrating Halloween. Although the prospect of seeing a scary costume is always present, so too is the fear of a receiving a “trick” over a “treat.”

Similarly, October has long been touted as a scary month for investors. Indeed, during such time they have faced precipitous drops in value in the US stock market. Just consider some of the infamous past Octobers:

• The Panic of 1907
• Black Tuesday (1929)
• Black Thursday (1929)
• Black Monday (1929)
• Black Monday (1987)

In more recent times, we had October of 2008 where the S&P500 dropped over 16%. In October 2018 we faced myriad trade and global financial concerns, resulting in another large-loss month.

Financial pundits seize on these dramatic past Octobers to talk about the “October Effect,” which is the expectation that stocks tend to lose money in October. In reality, this idea, and many other generalized ideas about market “patterns”, are mythical when held to the light of data.

Ironically, over the past 30 years, one of the best months of the year for US stocks, as measured by the S&P500, has actually been October, averaging some 2.3%! In contrast, September has been one of the worst months, averaging a loss of over 1%. Nonetheless, before we start selling in September and buying in October, we must recall that these are simple averages. Over the past 30 years, one month you would have lost over 10% in September, while you would have made over 8% in another.